And yes, on many occasions I have started out with a simple idea and by the time I was done I had 600 lines of code and only a vague recollection of what that original simple idea was. So take it from me: While “complex” can be good, in the end the complexity of a trading method typically says very little about the ultimate usefulness of said trading method.

And yes, “simple” can definitely be beautiful. So let’s look at a simple pattern.

Jay’s “Simple Pattern” Defined

To generate a buy signal this method looks for a particular 3-day pattern while the security in question is above its 200-day moving average.

*Filter: Security is trading above its 200-day moving average

*Day 1: Security closes below the low of the previous day

*Day 2: The day after Day 1 has no trading significance

*Day 3: Buy if the high of Day 3 is greater than the high of Day 2 (if no buy occurs on Day 3 the pattern is voided)

*The default is to buy at the Day 2 high plus ??? ($0.02?). This would involve placing a stop order prior to the trading of Day 3. But traders are encouraged to experiment with other entry methods.

*Set a stop-loss (open to discussion as to how far away to place stop)

*If not stopped out, then Exit on the first profitable close

That’s it.

This can also be utilized using weekly data, just use a 30-period (week) moving average as a trend filter rather than a 200 period moving average.

Example #1

Day 1 – the close is below the previous day’s low

Day 2 – the day after Trading Day 1

Day 3 – price breaks above Day 2 high triggering a long trade

1st profitable close occurs on day after Day 3

Example #2

Day 1 (1st red arrow) – the close is below the previous day’s low

Day 2 (1st blue arrow) – the day after Trading Day 1

Day 3 (not marked) – price DOES NOT exceed Day 2 high, so signal is voided

Day 1 (2nd red arrow) – the close is below the previous day’s low

Day 2 (2nd blue arrow) – the day after Trading Day 1

Day 3 (green arrow) – price DOES exceed Day 2 high, trade is entered above Day 2 high

1st profitable close – Price closes above entry price on Day 3 so trade closed there

Hopefully these examples help.

Jay’s “Simple Pattern” in Action

For the sake of example, let’s look at a daily bar chart for ticker IYR. In Figure 1 you see the daily chart with arrows drawn on all trading days that closed below the previous day’s low. these days represent Day 1 in the pattern above.Figure 1 – Ticker IYR with closes below previous low marked (this constitutes Day 1) (Courtesy: AIQ TradingExpert)

Not every Day 1 signal generates an entry signal. If the 2nd trading day after the “close below previous low” (Day 3) does not trade above the high of the day after the “close below previous low” day (Day 2), then no further entry signal exists and the pattern is voided.

Figure 2 displays ticker IYT with Day 3 highlighted only when an entry signal occurs.

So does this “Simple Pattern” constitute a viable standalone trading “system?” I leave you to figure that out on your own. But in any event the real point of this piece is simply to highlight the fact that when it comes to choosing a method or methods for trading in the financial markets, keep in mind:

Jay’s Trading Maxim #17: When it comes to the method you use to trade, remember, “It doesn’t have to be rocket science.”